* Rail operator set to raise up to $518 mln
* Plans to use proceeds to cut debt, fund infrastructure
* Freight unit boss wants to take on European market leader
By Pawel Bernat and Adrian Krajewski
WARSAW, Oct 8 (Reuters) - Poland's state railway operator is set to raise up to $518 million by selling shares in PKP Cargo, the European Union's second-biggest freight company, in what is expected to be Warsaw's largest stock market debut this year.
PKP, which fully owns the freight firm, will sell 50 percent minus 1 share of the unit, according to the issue prospectus. The rail operator plans to use the proceeds to cut its debt and fund infrastructure investments.
PKP Cargo, which trails Deutsche Bahn in terms of goods carried on Europe's railways, set the price range at 59 to 74 zlotys per share, valuing the share offer at up to 1.6 billion zlotys ($518 million) and the company at up to 3.2 billion.
The initial public offering (IPO) will be the first test of demand from Polish pension funds since the government announced plans to strip them of their bond portfolios to help cut the state budget deficit, which would leave the funds with mainly equity holdings.
PKP Cargo, which expects to debut on the Warsaw bourse on Oct 31, would be the European Union's first listed rail freight firm.
It will hold bookbuilding among institutional investors between Oct. 8 and Oct. 22, with individual investors able to subscribe for the shares offered on Oct. 9-Oct. 21. The company will set the final IPO price on Oct. 22.
PKP Cargo has around half the Polish market, Europe's second biggest after Germany. Deutsche Bahn's freight unit DB Schenker controls around 20 percent, but on a European scale is three times PKP Cargo's size.
PKP Cargo's net profit nearly halved in the first six months of the year to 77 million zlotys on 2.3 billion in revenue, year-on-year, mainly due to Poland's economic slowdown. Its core profit (earnings before interest, taxation, depreciation and amortisation) fell by a fifth to 312 million.
Its chief executive said in August that after the planned stock market debut it would look for acquisitions to take on the European market leader Deutsche Bahn.
"Most of all, we're looking at markets, where we already operate, which besides Poland include the Czech Republic, Hungary, Slovakia, Austria, Germany and Belgium," Lukasz Boron told Reuters.
PKP Cargo said it was interested in buying Polish fuel carriers, including a unit owned by the Lotos refiner.
Besides Cargo and DB, the Polish freight market is divided among almost 50 other players, with carriers owned by state-controlled refiners PKN Orlen and Lotos, as well as copper miner KGHM among possible targets.
PKP said the European Bank for Reconstruction and Development, which was created in 1991 to help eastern Europe make the transition to the market economy, will take at least a 5 percent stake in PKP Cargo during the share sale.
PKP Cargo picked Goldman Sachs, Morgan Stanley and PKO BP brokerage to serve as global co-ordinators and bookrunners for the offer.
Other institutions taking part in the share sale will be UniCredit, Raiffeisen Centrobank, Ipopema Securities and Polish brokerages Investors and Mercurius.